No need to feel sorry for the Incubator babies
When Nihon Shinko Ginko filed for bankruptcy on Sept. 10 the media reacted predictably with alarm. Any bank that fails is bound to send shivers through the population, even those who don’t have accounts with the institution in question. Incubator Bank of Japan, as it’s called in English, had debts that exceeded its assets by more than ¥180 billion, incurred through making loans to small businesses. Exactly 126,779 people had time deposits in the bank.
What makes the story especially notable is that this is the first instance of a bank failure in which the government will limit “payoffs” (deposit guarantees) to ¥10 million per account (plus interest earned) since the deposit guarantee program was begun in 1971. Between 1996 and 2005, the cap was suspended to prevent runs on banks that were hard hit by the post-bubble recession. The cap was reinstated as part of the financial reforms undertaken by former prime minister Junichiro Koizumi (Incubator, in fact, was started in 2004 by Takeshi Kimura, a pal of Koizumi’s financial services minister, Heizo Takenaka). For Incubator customers with more than ¥10 million in their accounts, there is no guarantee they will get it all back.
As it turns out, only 3,423 of Incubator’s depositors had more than that amount, and their total at-risk deposits — meaning the money in excess of the ¥10 million limit — only came to ¥11 billion of the total ¥582 billion in time deposits. The reason for this low amount is simple: Incubator took advantage of the payoff system by telling potential customers that there was no risk if they deposited less than ¥10 million, and then offered much higher interest on time deposits than any other bank, a cool 1.9 percent for five-year accounts. Consequently, they got lots of customers. They could offer this high rate because they do not offer regular savings accounts, which require lots of resources and personnel to maintain.
And the rest of the banks, or, more precisely, those banks’ depositors, provided the refunds to the Incubator depositors. Every bank has to pay the Deposit Insurance Corp. of Japan 0.084 percent of its total deposits as insurance premiums. And if that amount isn’t enough to do the job when the occasion arises, the government will step in with tax money.
But it sounds as if they aren’t going to need all that money anyway. On the first day refunds were made available, only ¥5 billion was removed, equivalent to 0.9 percent of the relevant deposits. One week later, the total amount so far taken out was only ¥29 billion. Apparently, most of the depositors who showed up to claim their money changed their mind once things were explained to them. While the DIC sorted out the bank’s affairs, time deposits would continue to accrue their 1.9 percent annual interest for up to eight months, at which point it is projected that a “reconstruction sponsor,” or replacement bank, will step in to take over these accounts. Then, most likely, the interest rates will drop to whatever that bank offers. But in any case, there’s no danger of losing money or interest, so depositors might as well keep their money there. In a sense, it’s important that they do, since the more money that’s taken out of Incubator, the more difficult it will be to find a replacement bank. If you do take your money out and the account has not reached its five-year maturity, your interest rate will drop to a fraction of the original 1.9 percent rate.
If the Incubator bankruptcy isn’t as dire as it was reported to be, it does, however, provide a modest illustration to average people of what “high risk-high return” means, and thus may have an even more flattening effect on investments. The amount of household assets that are now in cash and savings is ¥806 trillion, the highest it’s been since 1997. Japanese people are already afraid wary of stocks, mutual funds and other investment instruments, and the Incubator story isn’t going to make them any more willing to try something new. The people who put their money into Incubator are considered, relative to the average Japanese consumer, risky investors, which is why it is so easy to talk them into keeping their money there even as the media continues to report on its insolvency. The vast majority of Japanese put their money in the bank, even if it just sits there doing nothing.